Evolution of Monetary Policy Stance - Policy Stance in Fy 2008-09 - Bangladesh
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2. EVOLUTION OF MONETARY POLICY STANCE: AN OVERVIEW
Policy Stance in FY2008-09
Macroeconomic management in FY2007-08 had been challenging, particularly due to aggravated
inflationary pressure which was largely underpinned by high commodity prices including that of fuel,
food and fertilizer. Taking note of the trends in global commodity markets, the Bangladesh Bank in
its MPS for the first half of the fiscal year 2008-09 (FY09) set the inflation target at 9.0 per cent
(which was already in double digit at that time) and programmed adequate credit growth in order to
support the GDP growth target of 6.5 per cent (Bangladesh Bank, 2009). Priority was accorded to
credit which would support creation and expansion of output capacities, e.g. promoting agricultural
and SME loans and discouraging expenditures on ostentatious consumption. In order to reduce
money supply, the Bangladesh Bank also announced that Cash Reserve Ratio (CRR) should not be
less than 4.5 per cent, up from 4.0 per cent, in any day of the month; although, CRR on bi-weekly
average remained unchanged at 5 per cent. The central bank also mentioned that any bank that fails
to adhere by its CRR guidelines will be penalized at bank rate plus 5 per cent on the difference of the
reserves. BB also enhanced its Repo and Reverse Repo interest rates by 25 basis points in September
and November 2008 respectively to 8.75 and 6.75 per cent to slowdown the pace of private credit
growth.
As inflationary pressure started to cool down since October 2008, the Bangladesh Bank revised the
inflation projection downward to 8.5 per cent in its second MPS of FY09. On the other hand, as the
global economic recession weakened domestic economic activities, the Repo and Reverse Repo rates
were brought down to their earlier level in March 2009. The central bank also made engagement in
agriculture lending mandatory for all commercial banks including private and foreign banks during
this time. During the last quarter of FY09, the BB introduced a 13 per cent interest cap for on lending
(through directive instead of "moral suasion"), except for credit card and consumer loans and
allowed rescheduling of loans without any down payment until September 2009 to four exportoriented
sectors which were affected by fall in external demand viz. for frozen food, jute, leather
and textiles.
Thus, one observes that the monetary policy stance of the central bank in Bangladesh underwent a
few adjustments in response to domestic and global economic developments. As a result of these
adjustments as well as due to other policy and institutional interventions, Bangladesh economy, at
an aggregate level, performed quite appreciably in FY09, with a near-six per cent GDP growth and
four and a half per cent per capita income growth. Agriculture sector (particularly crop sector)
posted significant achievement to improve food security. Most of the macroeconomic indicators,
notwithstanding their structural flaws, exhibited overall robustness. At the end of the fiscal year,
lower than estimated inflation rate was realised (7 per cent) compared to revised target of 8.5 per
cent. Balance of payment was in a comfort zone, to a large extent due to buoyant foreign remittance
flow,
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